Does Rent-to-Own Build Your Credit?

A rent-to-own agreement allows you to rent a home for a specified period while providing the option or requirement to buy it before the lease expires. It is essentially a standard rental agreement and adds an option to buy the property at or later. Often the purchase price is also agreed in advance.

Depending on the contract, a portion of the monthly rent payment can be put towards the eventual purchase price, helping you build home equity as you go. This is a beneficial alternative route to homeownership for those who can't obtain financing due to poor credit or haven't saved enough money for a down payment. It can also be beneficial to buyers in a market where house prices are rising.

Types of rent to own agreements

Such rent to own contracts generally fall into one of the following two categories:

Lease option 

Here, you'll have the opportunity to buy the home if you want to but are under no legal obligation to do so. You can walk away after the lease is up if you change your mind; and

Lease purchase:

In this case, you'll be legally obligated to purchase the home at the end of the lease agreement. If you abandon the deal because you no longer want it or cannot afford it, you could be in for a legal battle.

Building or rebuilding your credit rating

There are certain challenges for anyone planning to buy a rent-to-own property with poor credit, perhaps due to having other debts such as high-interest rate bearing credit card or auto loan debt. The first is to make sure that once the option to buy has to be exercised, their credit rating is good enough to secure a mortgage to fund the purchase. The second is to be sure that once a mortgage is granted, you can continue with the necessary mortgage repayments.

So, the question often arises: does buy a rent-to-own property help build or repair your credit?

Your credit rating

With a mortgage or car loan, you usually make a monthly payment for an agreed set period. While making such timely mortgage or car payments may help your credit. Generally, your rent-to-own payments usually have no impact on your credit score at all.

The only accounts which show up on your credit report are reported to the credit bureaus. Are you meeting or defaulting on such payments that ultimately determine your credit score and rating.

Build your Credit - What can be done?

Clearly, suppose you really want to purchase the home at the agreed time. In that case, you need to work out how to boost your credit rating so that a mortgage lender will look favorably upon your application for a loan.

One way is to ask your landlord if they agree to report the rental payments to the credit bureaus such as Equifax. It might be necessary to provide a copy of the rent-to-own agreement and receipts showing your rental payment pattern.

Provided you make all of your rental payments on time it's possible that your credit score can go up. It goes without saying that late or missed payments will affect your score negatively.

To improve the chances to obtain a mortgage loan and be in a position to purchase the property once the lease period is up, it's well worth keeping track of every component of your credit to help build your credit score. Pay down debt as much as you can, especially any high-interest debt such as for credit cards. Continue making all payments on time and avoid unnecessarily taking on new debt.

You should also know your credit score before you sign a rent-to-own agreement and learn what's on your credit report. While there's no guarantee that you'll qualify for a mortgage at the end of the lease agreement. You can use the rental period to save, strengthen your credit and firm up your finances; you'll be in a better position to qualify.